Finding Mutual Funds with a Long-Term Rate of Return of Over 12%.

July 16, 2010

My post a few days ago about Dave Ramsey’s “Drive Free. Retire Rich.” program received this response from Chuck:

Here is a list of US Stock Mutual Funds from Morningstar Financial with at least a 10 Year track record making annualized returns of 12% or greater. I don’t ever recall DR stating leave your money in the same fund for 40 years and play dead. But maybe it was on a show I didn’t hear.

CGMRX CGM Realty 17.64
SSGRX BlackRock Energy & Resources Inv A 17.17
CGMFX CGM Focus 16.57
PSPFX U.S. Global Investors Global Res 16.57
LEXMX ING Global Natural Resources A 15.76
PRGNX Prudential Jennison Natural Resources B 15.59
RSNRX RS Global Natural Resources A 14.87
GHAAX Van Eck Global Hard Assets A 13.96
VGENX Vanguard Energy 13.51
YAFFX Yacktman Focused 13.10
RSPFX RS Partners A 13.00
ICENX ICON Energy 12.90
FAIRX Fairholme 12.74
IGNAX Ivy Global Natural Resources A 12.49
BURKX Burnham Financial Services A 12.48
FSDPX Fidelity Select Materials 12.48
YACKX Yacktman 12.43
LMVYX Lord Abbett Micro Cap Value I 12.39
HWSIX Hotchkis and Wiley Small Cap Value I 12.22

There’s just one problem with this list…

These are all HISTORIC returns. Ten years ago, would a person have picked these funds, knowing that they would return north of 12%? I think the answer to that is a resounding, “No.”

Also, take a look at that list. Eight of those funds are in natural resources, which would have been a defensive sector ten years ago. Take a look at this Morningstar graph for Van Eck Global Hard Assets:

Notice how the fund didn’t really take off until nearly halfway through 2003. The point? Well, no one would have seen the bull market in commodities coming. Therefore, no one would have had the foresight to invest their car money (referring to the original post) in such a fund.

Now, there are a couple of funds in the list that are general stock market funds. Still, it would have been difficult to pick such funds back in 2000. The Fairholme fund was barely a year old back in 2000.

The bottom line is that although there are funds that returned 12% in the past, it would have been hard to find them 10-years ago. Dave Ramsey’s reckless to use such a hypothetical rate of return with his listeners.

14 responses to Finding Mutual Funds with a Long-Term Rate of Return of Over 12%.

  1. I’ve heard a theory of going with the big fund companies’ newest funds. The idea behind this is that they are smaller and more agile, and that these funds get the best and brightest for the first couple of years to drive up the returns and attract customers.

  2. There are over 5,000 mutual funds when you factor in all the share classes, and only 19 have 12% returns over the past decade. What is the probability of finding one of these…minute.

    @Jack: you are correct that the best time to invest in a fund is when it is unknown. Peter Lynch is a great example. He crushed the market the first few years he ran Fidelity Magellan. Then when he became popular, he barely topped the markets, which is still good, but it wasn’t what he delivered before. The problem is many funds also fail at that stage. They give money to a new manager who ends up being a dud. The fund is then rolled into another fund and everything is forgotten. So it isn’t as easy as that.

    DR isn’t referencing those funds when he talks about 12% returns in good growth mutual funds.

  3. LOL,that list is the biggest data mine ever.

    So out of 5,000 plus funds 19 (less than .5%) produced 12% returns. Note, .5% is overstating the odds, because it doesn’t account for funds the that are no longer in existence.

    Also, alot of the funds on that list are value/natural resource/real estate. DR recommends growth stock funds. Just eyeballing it, I’d guess that only 3 or 4 growth funds made the list.

    Generally speaking, I like DR’s advice, but I cann’t understand why he makes this recommendation.

  4. Bender: “Generally speaking, I like DR’s advice, but I can’t understand why he makes this recommendation”

    because it helps make a point to the target audience of Ramsey- those in debt. He is not going after the same people as you are I….he is going after those that have been irresponsible with money. It is a sales tactic. What is so hard to understand about this?

    JLP- I really don’t understand why you are so hung up this 12% issue. This is a recurring thing for you. My only thought is that you feel pressure from your clients that they aren’t earning enough? or you have to “teach” them about real returns not some mythical 12% return? It is all marketing on the part of Ramsey and you just put down the evidence that it isn’t false, it can be done. I offer other examples of large, broker sold and been around the block mutual funds: Lifetime fund returns for AIVSX (11.86% with sales load and started in 1934) VWNDX (10.94% and started in 1958) LAFFX (10.6% with sales fee since 1934) AGTHX (13.31% with sales charge since 1973) AWSHX (11.32% with sales charge since 1952) AMRMX (11.32% with sales charge since 1950) FCNTX (11.98% since 1967) FEQIX (11.2% since 1966) FDGRX (12.02% since 1983) FMAGX (16.31% since 1963) FMILX (12.69% since 1992)

  5. JLP or Kirk,

    How do you reconcile the 12%+ historic returns vs. index investing?

  6. Evan,

    I’m not disputing the fact that certain mutual funds can and will outperform the index. The question(s) becomes:

    How do you know in advance which funds will outperform? Based on historical performance? As we all know, historical performance is no assurance of future performance. Fund managers change, funds get bigger (making it harder to out perform), redemptions happen… Lots of things can happen that impact fund returns.

  7. @JLP … thanks for agreeing and showing that yes some funds may provide a 12% annualized long term return. This was the overall point of the post.

    @Bender: I did not state every fund in my list was a growth fund (perhaps I should have clarified this) … my list was a quick fund ranking of US Stock Funds only … nothing more. I didn’t break down each category or include International Stock funds which would have expanded the list. I was simply making the point (because many in the forum seem to think a 12% return was IMPOSSIBLE or that there are no funds with that type of track record).

    Maybe my view is slightly different than JLP or others. I don’t look at funds and say “how would I have known to invest in this particular fund 10 years ago…” (as the example indicated).
    My personal view: past performance is NOT a garuntee of future success, but it IS something to consider when selecting a fund to invest in … I would be surpised to find out someone would not consider past history for current investing strategies.

    I personally don’t like unproven funds with no track records … maybe you do or don’t. I use the track records as a tool to help me in my decisions to invest or not invest in a fund. If someone feels this is unwise … then so be it. We all enjoy the freedom to choose how we invest. I hope both my choices and your choices lead us both to wealth.

    My take on DR … I like him. I like his investing strategy … because its worked for me. If you don’t like it, then don’t do it … but it would be untrue to say it cannot work.

    Thank you again JLP for your blog and allowing people to discuss things in an open environment.

  8. #7 Chuck) I like DR’s advice for getting out of debt — but past the first couple of baby steps I disagree with him.

    If your retirement plans are based on you earning 12% yearly, then good luck.

    My retirement plans are more realistic and don’t require such high returns. My plans require 0% returns when adjusted for inflation: can you even guarantee that?

  9. #8 BG) There are plenty of people who disagree with DR about the 12% …. It comes down to what someone finds plausible or realistic, I think we both will agree on that. … Can I guarantee 0% returns when adjusted for inflation … hmmm…Sounds like a loaded question. If you can and it allows you to retire in the manner you desire, then great! … However, I’m not just trying to hedge my money only against inflation and there are no gaurntees on DR’s investment approach. If hedging against inflation was was my only goal I would probably invest differently.

    As I said before … I like DR strategy because it works for me. I’m not sure why thats such a bad thing or why it seems to rub people the wrong way. If a few more years down the road my investments stop earning my goal returns … I’ll be sure to come back and let you know 🙂

    I’m just curious … because of the nature of the discussion. So does anybody here TRY to make a greater return than 7-9%? If you DO attempt this … Why? Most seem to say its not possible … so why try?

  10. Coming late to this party, but I noticed in the introduction to Total Money Makeover (preview on Amazon, page xv), DR addresses the 12% assumption and gives a few details. Based on his quoting 11.67% for the S&P over 80+ years it seems like he’s incorrectly using the arithmetic average as an annualized return.

    Can anyone track down which funds he quotes here?

    “Growth and Income Stock Mutual Fund” averaging 12.03% since 1934 (until sometime in 2009).

    Another averaging over 13.9% since 1973.
    Another averaging 12.01% since 1984.
    One 12.39% since 1973
    11.73% since 1952

  11. Jonathan wrote:

    “Growth and Income Stock Mutual Fund” averaging 12.03% since 1934

    I’m pretty sure that’s American Funds’ Investment Company of America.

    Not sure about the other ones but it doesn’t really matter because no one is arguing that there aren’t funds that can return that. The problem is that those are all past returns and no one would have had an inkling that those returns lie before them had they purchased those funds in the past.

    Bottom line in my opinion:

    Dave’s ignorant to use a 12% rate of return in his examples.

  12. I have read this entire conversation and it smells of arrogance. It’s is funny to read the debate from chest-pounding dudes who think they have to smack everything down if it wasn’t thier own thought.
    If it works for you, use it. If it doesn’t work for you, DON’T USE IT.
    Anyone that listens to advise from half of you on this topic gets what they deserves!
    Go take another HGH pill, someone will be impressed with your hairy chest!

  13. I think the important thing to note is DR is selling ideas. Get out of debt and invest. If he uses a little fudged numbers to inflate the listeners idea of the future, is the listener going to be devastated in ten years when he’s out of debt and he’s only earned 8%. I think not. The ideas still changed his life.

  14. I’m way late on this discussion, but just to add from having heard Dave over the years… he frequently points to 12% historically, but has also said that, if he’s wrong by half, you’re still doing pretty good compared to the rest of the population. He doesn’t hold dogmatically to the 12%, and often says the market is volatile, but that it can be accomplished.

    He’s setting people’s sights high and getting them to think about investing, and doing so across a broad range of growth, growth and income, aggressive growth and international funds.

    We could quibble over the mix, but I think the overall advice is pretty good. I’d say that can be done and likely to be done on our own are two different things, but I agree with the overall message.